The Green Cable Corporation issued a new series of bonds on January 5, 2015. The bonds were
Question:
The Green Cable Corporation issued a new series of bonds on January 5, 2015. The bonds were sold at par ($1,000), have a 6% coupon rate, and mature in 30 years on December 31, 2045. Coupon interest payments are made semiannually (on June 30 and December 31).
(a) What was the yield to maturity (YTM) of the bond on January 5, 2015?
(b) Assuming that interest rates had fallen to 5%, what was the price of the bond on January I, 2020 (five years later)?
(c) On July 1. 2017. the bonds sold for $922.38. What was the YTM at that date? What was the current yield at that date?
Step by Step Answer:
Given Par value 1000 coupon rate 6 paid as 30 semi...View the full answer
Related Video
Bond valuation is the process of determining the worth of a bond. It is based on the present value of the bond\'s future cash flows, which include coupon payments and the return of the bond\'s face value (or \"principal\") at maturity. The discount rate used in the calculation is directly tied to prevailing interest rates, and a rise in interest rates will decrease the present value of the bond and thus lower its price. Conversely, a fall in interest rates will increase the present value of the bond and raise its price. Interest rates serve as a benchmark for determining the value of a bond, as they determine the discount rate used in the bond valuation calculation. The most commonly used measure of interest rates is the yield to maturity (YTM), which represents the internal rate of return of an investment in a bond if the investor holds the bond until maturity and receives all scheduled payments. Yield to maturity is a function of the coupon rate, the current market price of the bond, the face value of the bond, and the number of years remaining until maturity. By comparing the yield to maturity of a bond to prevailing market interest rates, an investor can assess the relative value of the bond.
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